Making an offer on a self storage business

9 Replies

I have a self storage owner come to me with an off market deal for his 84 unit business with room to expand. It as has a newer model home onsite a business is renting as an office. His rates are well below market, even for the small town he is in. The only other operator within 3 miles would be $5 below the price I would move the rates to and he has been full for the past year.

Has anyone had experience taking over a self storage business and raising rates $5-20 per month? My rates would be at market but I don't want to have a bunch of people moving out at the beginning.

I am going to try getting the owner to finance 100% of the down payment on an 8 year note.

After accounting for all expenses including the note, it comes to about $500 in cash flow at 87.5% occupancy.

As I move purchase price and terms around as we negotiate, at what cash flow amount would you pass on the deal?

It'll depend on the purchase price and NOI etc. and effort to run the place. Are you going to run the facility or does your cashflow account for a person to manage the place. Do you foresee reducing the occupancy and you already mentioned increasing the rents. If there is significant value add I might accept lower cashflow now if I'm confident I can increase it relatively quickly. If I have to manage it then I'd want more cashflow as it isn't just an investment but a job/business as well.


 

If the new rates are market, where are people going to move their stuff? How far would they have to go to save a significant enough amount to make the work worth it? In my mind, the competition would be to fill the open units. Is the convenience and value there to justify the extra over the competition? Do you have a value add like security cameras to justify an even higher premium?

Is that cash flow from the current or projected rents? What is the monthly time commitment, and does the cash flow meet the hourly value of your time?

For houses and apartments we have $/door and CoC ROI metrics. What are the industry benchmarks for storage unit profitability? CoC ROI would still fit, but is it then $/unit, $/sq ft, or something else?

That sounds like an interesting opportunity. I hope it works out for you.

@Nicholas Ludwiczak

See the post I did on Self Storage valuation.

Cash flow at 65% occupancy should be zero, including interest and principal; for Phase 1 build.  That's on a 20 to 25 year term loan.  If your at $500 per month on 87.5% occupancy, I would walk away.

Do a cost to build on the Storage units.  I'm going with a 2 to 3 acre lot out in the suburbs or countryside.  $3,200 erected per unit; 3 acres at $??,???, Fence 2 acres $20,000; Gate system $15,000;  Electric $7,000;  Security $7,000; road rock $20,000; driveway entrance $??,???; No water/sewer/storm pond or drain.

Segregate the analysis of the house and the storage.  Especially if the house can be subdivided from the storage and sold and managed separately.  Analyze the house like you would normally do.  Then isolate on the storage.

This is a good size location to start with.  Determine if Self Storage is something you want to do.  I like to stay in my "lane" and not have several different types of businesses going at once.  Or if your market is small there, then you might need more "Lanes".

Find out why he is only 87.5% full.  Either the market is not big enough.  Or he is not marketing correctly.  Or he just added new units.  87.5% full from a unit, economic or sq foot standpoint?  If it is from a unit standpoint and most of the vacants are 5 x10's; but the economic occupancy it 95% then different questions arise.

Changing rates is not that big of an issue.  As people noted above, where are they going to go?  Its the middle of winter, also.  If you are sensitive to the potential for people leaving, then do it in segments.  Example: Do it by unit size, every 2 months a different size increase.  Or do it on all new contracts.  Or do it based on Lowest rates first or long term renters first.

This could be a great deal, but analyze your market.  What is the population size and how many units are in the immediate area?  Raising rents even $10 per unit has a large impact on the analysis.  If your market can support it, do a Phase 2.  This will only take a 35% occupancy to breakeven/payoff.  Added to Phase 1, this makes the total deal more attractive.

Check with your bank if they are willing to take a Second position on the property, if the owner does a loan on the down payment.  Don't ask the owner for a loan.  Just have the balance due 5 years out with zero % interest as part of the sale.

Don't buy the "business".  Buy the assets.  Have the assets listed separately on the contract.  House/roads/buildings/fence/electrical/security/signage/landscaping/etc.  That way it is easier to do year one writeoffs and not have to do a Cost Segregation study.  You determine the figures, tell him the figures to use for each of the above. Don't ask, unless he just built all of this and it is fresh on his mind.  Try to put as much value as possible away from the house and the storage buildings, to get faster write off.  Ask if you can put in a section for a Non Compete agreement so you can move more money away from the house and buildings.  You can write it off quicker.

Try for a 10% SBA loan.  To hold the deal since SBA can take a while, do a $10,000 earnest money deposit for 6 months.

Great first step into Self Storage.

@Henry Clark

I have never posted on BP before I have always just read and absorbed the info, but I wanted to thank you Henry for this and all of your posts. You are a wealth of information and the detail you go into in your posts is much appreciated.

Thank you!

@Troy Owen

Your welcome.  I'm only here for the next 1 to 1 1/2 years; until we move on to our next investment asset and life style.  Please use the Self Storage services and training centers as much as possible.  I don't know how much they cost, but I can tell you whatever it costs, I have more than paid for a years worth of training through my learning experiences.

Looks like your already an investor, so the following comment might not be for you.

Growing Wealth takes three things:

a.  An Idea.

b.  Financing (not necessarily)

c.  Someone to jump off the 9-5 cliff.

Start small and Make Your Big Mistakes Early.


@Ken Naim  

Purchase price around 500k. NOI at 100% occupancy would be $1,045 with raised rents with the following expense.

Yearly Expenses

Amount

Amount per month

Loan @ $400k

$ 25,308

$ 2,109

100k Note 8 years

$ 15,192

$ 1,266

Taxes

$ 3,700

$ 308

Insurance

$ 1,300

$ 108

Snow Removal

$ 1,140

$ 95

Maintenance

$ 2,000

$ 167

Total

$ 48,640

$ 4,053

I would manage it myself. This is one of the things I am wondering about. I self-manage 6 rent units (2 duplexes and 2 SFHs).

I would use a software management software that people could pay online or setup auto pay. Put I would still manage 84 payments every month including people coming and going. Will that become too much work for what it’s worth.

@Philip Cook

That was my thinking. Some people might leave because they find it not worth keeping it but they will not find anywhere cheaper. The rates would still be “cheaper” than most in the area.

My value add would be the following. Marketing: Currently owner has done zero marketing since he has owned the business and he is at 100% occupancy. I think because his rates are so low, and he is on a busy road. His business isn’t even on good maps and doesn’t show up on a google search. I would change all that including Facebook marketplace when units were open. I could add a few security cameras, but they have had good luck when it comes to security because there is a “house” in the middle of the lot, even thought it’s used by a business, and a few houses right by the units. Cash flow is protected rents. At the current rents, I think it would be a loss. Time commitment is a good question and one I am struggling with. He says he doesn’t spend a lot of time each month but it might be a lot to manage 84 units knowing I will not make enough to outsource management until the note is paid off in 8 years.

CoC RoI is hard to predict because I am trying to do the deal without putting cash down. Owner financing the down payment and bank paying the other 80%.

@Henry Clark

If I was at about $1,000/month with 100% occupancy on a 25 year loan and owner financing on the 100k down payment over 8 years, would you still walk away? If I did the deal, I would be putting no money down. If I financed the $100,000 down payment, or after the note is payed off in 8 years, it would move to $2,266 per month.

So no money down, $845/month cash flow at 95% occupancy and about $800 of principle paydown.

I really do apricate your comment about staying in my “lane”. I have been doing good at acquiring and managing rental properties so it does concern me this new adventure would limit my ability to grow even after having systems and processing in place. My market is small and the town the store business is in is only 300 people, but I am still finding plenty of opportunities for rentals.

I should have been clearer. He is at 100% occupancy, I was just underwriting it on the conservative side after moving to market rents.

Population size of the town it’s located is 300. There is a storage place about 2 miles down the road that is at 100% occupancy between this town and a town of 600. He does have an interesting mix of sized with 40 of the units being either 10x24 or 10x20 and a lot of large units fair below market. A few examples are 10x20 $40 ($55 market), 10x24 $40 ($60 market) 16x20 $50 (Market $110, I would move to $75 to start)

Our suggestion is an interesting way to structure the deal. I am not sure the banking would be willing to take a second position, but I can ask. Thank you for all your other advise as well. I watched your commercial. Very well done, I love your workflow and your property is beautiful.

@Nicholas Ludwiczak I hope the house is enough of a deterrent. I will just mention that the storage on Patch St. was broken into this fall. There are houses on three sides with the closest one being 30' from one of the buildings. It sounds like it was a "pro" who knew exactly where to pry to get the doors open. 

@Nicholas Ludwiczak

If your going to get into Self Storage, this is a great deal.

The market sounds small for these two locations, thus there must be a lot of people living in the countryside.

Here is the approach I would take for a small market Self storage setup.  Subject to zoning.

Use Cargo Containers.  The risk of a small market is over building. 

-  Containers can be added in small increments.  

-  They can be sold or moved if the market is not there.

- They can be installed during the winter.

- No property taxes.

- Recommendation.  Look at all small towns or road intersections.  See if you can buy 1/2 to 1 acre size lots along the road.  Lay two rows of rock about 4 inches off the ground and set the containers on top of them.  Make sure the rock and the containers are level or the doors won't work right.  Look for my post on Cargo Containers.

-  Identify a looping road route and build along that route.  Take a sandwich, apple, drink, and weed spray and do your loop once a week.  See my self Service youtube on our website on setting up self service.

Managing- we use Webselfstorage.  Have not compared, not saying its the best.  $44.95 per month web based.  Set everyone, even your house renters up on the system.  Try or make them go to autopay.  If they don't go to autopay, raise there rents $10.  We have 800 customers and about 650 are on autopay.  We don't send out invoices.  Would not do manually or be in the business otherwise.

Great investment.

@Nicholas Ludwiczak . Great analysis, @Henry Clark as usual.  

I would add that it's important to check competition/demographics. Using Radius+ will be well worth it. It tells you the square feet of storage per person in a given radius. Like 3 miles or so.  An ideal location would have less than about 7 square feet of storage for every person in the given radius.  Generally ignore the 1-mile radius since it is often a commercial location. Good luck!